There's a story by Reuters citing the latest edition of German magazine Der Spiegel,
which is reporting that the ECB is considering setting an explicit top
yield threshold for peripheral nation borrowing costs at its meeting in
September.
In other words, ECB chief Mario Draghi would come out and say something like: "Italy's 2-year borrowing costs shall not be more than 300 basis points above Germany's 2-year borrowing costs, and if it rises above that level, the ECB will come in and press it down via bond purchases."
It would be an incredible game changer for traders to know that the ECB was sitting there on the bid at a certain level, standing ready to buy sovereign debt.
That the ECB would eventually do something like this has been buzzed about for a long time, but speculation really started heating up in late July, when Mario Draghi came out and said that high peripheral borrowing costs were impeding the transmission of monetary policy, and thus came under the purview of the ECB.
He further hinted at something like this at the August meeting, when he talked about making purchases at the short end of the yield curve, offering the market a very clear idea that more action was on the way.
The problem with the ECB committing to keeping a nation's borrowing costs low (or relatively low) is that it creates a moral hazard problem. If Italy knows that the ECB will fund it at X.XX%, Italy's inclination may be to borrow and spend as much as possible, knowing there will be no ramifications in the market.
In other words, ECB chief Mario Draghi would come out and say something like: "Italy's 2-year borrowing costs shall not be more than 300 basis points above Germany's 2-year borrowing costs, and if it rises above that level, the ECB will come in and press it down via bond purchases."
It would be an incredible game changer for traders to know that the ECB was sitting there on the bid at a certain level, standing ready to buy sovereign debt.
That the ECB would eventually do something like this has been buzzed about for a long time, but speculation really started heating up in late July, when Mario Draghi came out and said that high peripheral borrowing costs were impeding the transmission of monetary policy, and thus came under the purview of the ECB.
He further hinted at something like this at the August meeting, when he talked about making purchases at the short end of the yield curve, offering the market a very clear idea that more action was on the way.
The problem with the ECB committing to keeping a nation's borrowing costs low (or relatively low) is that it creates a moral hazard problem. If Italy knows that the ECB will fund it at X.XX%, Italy's inclination may be to borrow and spend as much as possible, knowing there will be no ramifications in the market.
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